1. ACCA F1 – Accountant in Business Lecture 6 Randolph Metz-Johnson randolphmj@rmjpilondonbusinessacademy.com

2. LAW AND REGULATION GOVERNING ACCOUNTING

3. OBJECTIVES: Upon completion of this chapter you will be able to: Outline the history and development of the accounting and finance role in business; Explain the purpose of the accounting function; List the authorities to which companies are accountable in financial terms; Explain the basic legal requirements in relation to keeping and submitting proper records and preparing financial accounts; Explain how the international accountancy profession regulates itself; Describe the main financial systems used within an organisation.

4. Regulations covering accounting function Responsibility to: Companies House (for filing of accounts) Tax Authorities (e.g. HMRC for VAT, PAYE) Financial Services (e.g. stock exchange for listed companies) Regulators (in certain industries)

5. Responsibility for financial records This rests with the BOARD OF DIRECTORS of the company While the task of maintaining and preparing the accounts can be delegated to more junior staff, the responsibility for the production of accurate accounts remains with the directors.

6. Bodies governing the accounting function IFRS Foundation, parent entity of: International Accounting Standards Board (IASB) International Financial Reporting Interpretation Committee (IFRS IC) IFRS Advisory Committee (IFRS AC)

7. ACCOUNTING AND FINANCE FUNCTIONS WITHIN BUSINESS

8. Purpose of accounting function Produces financial information that will be used to make decisions May be produced for users outside the company e.g. sales invoices, financial statements May be produced for users inside the company e.g. ledgers, cost information

9. Modern accounting function Structure of accounting function: Financial Accounting (maintaining books and records, preparing accounts) Management Accounting (appraisal, budgeting) Treasury (cash management, tax affairs) Auditing (reviewing financial reports and internal controls)

10. Recording of transactions

11. Management accountingFinancial accounting Internal useExternal use Aids planningRecords financial position and performance Not legally requiredLegally required No set formatFormat defined by law Financial and non-financialMainly financial Historic and forward-lookingMainly historic Financial vs. management accounting

12. Management accountingFinancial accounting Cost schedules – list of costs involved in making a unit of each product made. Statement of Financial Position – snapshot of assets, liabilities and financing Budgets – shows total planned revenue and costs or cash flows for the coming period Statement of comprehensive income – shows revenues and costs for the period. Variance reports – compares budget to actual results to aid control. Statement of Cash Flows – cash receipts and payments for period. Management and financial accounting reports

13. Treasury function Working capital management – monitoring cash balances and working capital. Cash management – preparation of cash budgets and arrangement of overdrafts Financing – monitoring of the company’s investments and borrowings. Foreign currency – monitoring of foreign exchange rates to minimise exchange losses The treasury function

14. FINANCIAL SYSTEMS AND PROCEDURES

15. Financial Procedures Stages in: Sales cycle Purchasing cycle Wages cycle Cash system Inventory system

16. The purpose of organisational control PurposeWhy important Safeguard company’s assetsIf assets are stolen or damaged the company will have to spend money to replace them EfficiencyInefficient business practices are a waste of the company’s money Prevent fraudFraud means the loss of valuable resources belonging to the company Prevent errorsErrors can lead to losses in efficiency (time spent correcting) or a loss of assets (e.g. paying for goods that weren’t received)

17. Group Exercise 1

18. Feedback

19. Break

20. THE RELATIONSHIP BETWEEN ACCOUNTING AND OTHER BUSINESS FUNCTIONS

21. Coordination between accounting and other business functions

22. AUDIT AND FINANCIAL CONTROL

23. Internal and External Audit Internal auditing is an independent activity, established by management, to examine and evaluate organisational risk, management processes and control systems and make recommendations for improvements External auditing is an independent examination of the financial statements to see whether they give a true and fair view of the company’s affairs

24. Internal and External Audit - differences Internal AuditExternal Audit RolesAdvises management on the strength of internal controls and protecting the organisation against loss Provides an opinion to the shareholders on whether the financial statements give a true and fair view Legal BasisNot a legal requirement, but highly recommended by The Combined Code Legal requirement for most companies and public bodies Scope of WorkDetermined by management Determined by auditing standards ApproachEvaluates and recommends improvements to controls Tests items and transactions in the financial statements StatusCompany employeesIndependent accountants

25. Internal Controls Internal Control is a process designed and initiated by management to provide reasonable assurance about the achievement of the entity’s objectives with regards to: reliability of financial reporting effectiveness and efficiency of operations compliance with laws and regulations Internal controls are checks on day to day transactions. They are managements responsibility.

26. Components of Internal Control

27. Categories of Internal Control

28. Types of Control

29. FRAUD, FRAUDULENT BEHAVIOUR AND THEIR PREVENTION IN BUSINESS

30. Fraud Fraud is an intentional act involving the usage of deception to obtain an unjust or illegal advantage. It is a criminal offence Prerequisites include: dishonesty, motive and opportunity Fraud could be committed by management, employees or third parties

31. Examples of fraud

32. Money laundering The exchange of money and assets that have been criminally obtained for ‘clean’ money and assets that have no clear link to criminal activity. There are usually three phases of money laundering: placement, layering and integration. Reporting process:

33. Implications of fraud Company collapse Adverse publicity Reduced profits Qualified audit report since financial statements do not give a true and fair view Distorted performance results make it hard for managers to make business decisions

34. Responsibility for preventing fraud

35. IT systems security Risks to data: Human errors Technical malfunction (e.g. systems crash) Natural disasters (e.g. fire, flood) Sabotage or espionage Malicious damage

36. Principles of data security Use individual and complex passwords Secure communication channels (e.g. fire walls) Back up information on a regular basis Have a contingency plan Physical security for documents Policy on suspicious emails

37. Group Exercise 2

38. Feedback

39. End